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BorgWarner Downgraded to Neutral - Analyst Blog

We recently downgraded our recommendation on
BorgWarner Inc.
(
BWA">BWA
) to Neutral from Outperform. Headquartered in Michigan,BorgWarner
is a leading manufacturer ofpowertrain products for the world's
major automakers including
Volkswagen AG
(
VLKAY">VLKAY
) and
Ford Motor Co.
(
F
).

Its products include four-wheel-drive and all-wheel-drive
transfer cases (primarily for light trucks and sport utility
vehicles or SUVs), as well as automatic transmission and timing
chain systems.

The company released its third quarter 2011 earnings on October
28, 2011.BorgWarner realized a profit of $1.15 per share, up 64%
from 70 cents per share (excluding non-recurring item) in the
year-ago quarter.

Net sales surged 27% to $1.79 billion from $1.41 billion in the
year-ago quarter on the back of strong demand for the company's
products, which are amenable to improved fuel economy and ensure
emission standards.

Operating margin income rose to $198.8 million from $123.0
million in the prior-year quarter. Consequently, operating margin
improved to 11% from 9% in the year-ago quarter. The increase was
attributable to the company's cost management measures.

BorgWarner expects net newpowertrain business of $2.5 billion
from 2012 till 2014, reflecting a 9% increase from its previous
three-year net new business. About 80% of the new business is
expected to come from engine-related products including
turbochargers, ignition systems, emissions products, engine timing
systems, variable cam timing modules and thermal systems.

The remaining 20% of the business is expected to emanate
fromdrivetrain-related products such as the company's
fuel-efficientDualTronic transmission technology, traditional
automatic transmission and all-wheel drive technologies.

However,BorgWarner faces continued pricing pressure from the
OEMs to reduce costs. Annual price reductions to OEM customers have
become a permanent feature of its business. The company's ability
to pass through increased raw material costs to its OEM customers
is limited, with cost recovery often less than 100% and often on a
delayed basis.

Moreover, the company's high concentration of sales to its major
customers such as Volkswagen and Ford also makes it more vulnerable
to risks.

Considering all these factors, the shares ofBorgWarner are also
maintaining aZacks #3 Rank reflecting a short-term "Hold"
rating.

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